Slovenian economic mirror March 2009, No. 3. Vol. XV Slovenian Economic Mirror ISSN 1318-3826 No. 3 / Vol. XV / 2009 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Director: Boštjan Vasle, MSc Editor in Chief: Jure Brložnik, MA Matej Adamič (International Environment); Barbara Ferk, MSc, Katarina Ivas, Janez Kušar, Jože Markič, MSc, Tina Nenadič, Mateja Peternelj, MSc, Jure Povšnar (Economic Developments in Slovenia); Saša Kovačič, Tomaž Kraigher, Ana T. Selan, MSc (Labour Market); Slavica Jurančič, Miha Trošt (Prices); Jože Markič, MSc (Balance of Payments); Marjan Hafner (Financial Markets); Barbara Knapič Navarrete, Jasna Kondža (Public Finance); Judita Mirjana Novak ((In)solvency), Mateja Kovač, MSc (Agriculture - Producer Prices of Agricultural Products) Editorial Board: Lidija Apohal Vučkovič, Marijana Bednaš, MSc, Alenka Kajzer, PhD, Rotija Kmet Zupančič, MSc, Janez Kušar, Mateja Peternelj, MSc, Boštjan Vasle, MSc Translator: Marija Kavčič Language Editor: Terry Troy Jackson Data Preparation and Graphs: Bibijana Cirman Naglič, Marjeta Žigman Concept and Design: Katja Korinšek, Pristop DTP: Bibijana Cirman Naglič Print: Tiskarna Solos Circulation: 500 copies The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents In the Spotlight . 3 Current Economic Trends................................................................................................................................5 International Environment...............................................................................................................................................7 Economic Developments in Slovenia...............................................................................................................................................8 Labour Market.........................................................................................................................................................................................13 Prices..................................................................................................................................................................................15 Balance of Payments.......................................................................................................................................................19 Financial Markets...................................................................................................................................................................................21 Public Finance..........................................................................................................................................................................................23 Selected Topics..............................................................................................................................................27 (In)solvency..............................................................................................................................................................................................29 Agriculture - producer Prices of Agricultural Products.........................................................................................................30 Statistical Appendix......................................................................................................................................33 Boxes Box 1: Economic Growth in Q4 2008...........................................................................................................................10 Box 2: Spring Forecast of eEonomic Trends...............................................................................................................11 Box 3: Weight of Liquid Fuels and Energy in the HICP...............................................................................................16 Box 4: Market Shares......................................................................................................................................................17 Box 5: Main General Government Aggregates, ESA-95............................................................................................24 Slovenian Economic Mirror, March 2009 3 In the Spotlight In the spotlight Following the 3.5% economic growth of2008, GDP is expected to decline (-4.0%) in real terms in 2009, for the first time since 1992, mainly as a result of increasingly strong negative impacts of the global economic and financial crisis. Owing to declining exports and investment, Slovenia already posted negative economic growth (-0.8%) In the last quarter of 2008. With a further rapid deterioration of the situation in the international environment over the past few months, which was reflected in a dramatic decrease in global trade flows, international institutions revised their forecasts significantly downwards, which is also the key reason for the notably lower spring forecast compared with the baseline (1.1%) and alternative (0.6%) scenarios from December's Revised Autumn Forecast. Since December, the forecast for economic growth in the euro area has declined by almost 4.0 p.p. For example, the OECD expects a 4.1% real GDP drop for 2009 and recession is now projected for all of Slovenia's other trade partners. Owing to a decline in foreign demand, this year will see a remarkable decline in exports (-8.6%), particularly merchandise exports. The decline in investment will be even more pronounced (-12.0%), because, due to Slovenia's high dependency on exports, the situation in the international environment also has a great impact on the investment decisions of enterprises. In addition, sources of finance are limited and construction investment will also slow this year. Due to the tightening conditions on the labour market, lower disposable income growth and the expected higher propensity to save, private consumption is also expected to drop in real terms (-0.6%). Only government consumption will see positive growth (3.2%). In addition to expenditure related to the operation of automatic stabilisers, the largest increase will be posted for social transfers in kind supplied by market producers, as a consequence of measures adopted in the run-up to elections; growth of expenditure on medicines will also be strong. Value added will drop in almost all private sector activities, particularly in manufacturing (-9.0%) and construction (-10.0%). In 2009, the key reason for the expected strong decline in value added in manufacturing is a sizeable decline in domestic and foreign demand against the background of the adopted measures which will mitigate the consequences of the economic crisis. The drop of industrial production in manufacturing deepened further in January, totalling -19.3% year-on-year. In January, a similar y-o-y drop was also recorded for the value of completed construction work (-20.0%), which increased relative to December, but remained lower than before the notable moderation at the end of last year. Infrastructure investment is not expected to increase, except energy infrastructure; construction of buildings is also set to decline. A value added contraction is also expected for market services, particularly those related to domestic industrial and construction activities. Negative prospects for Slovenia's economy are also corroborated by data on business trends, given that the business sentiment indicator dropped to a new low in March (since the beginning of measurement in 2000). Amid the tightened economic conditions this year, a significant deterioration is also expected on the labour market, where the number of employed persons will decline by more than 5%. The number of registered unemployed persons increased by more than 20,000 in the six months from September, to 79,682 in March. The survey unemployment rate will increase from 4.4% to 6.0%, and the registered unemployment rate from 6.7% to 8.9%; the number of registered unemployed will thus climb to around 100,000. The years 2009 and 2010 will see a considerable gap between real wages rises in the private sector and in the public sector. Real growth of the gross wage per employee will increase in 2009 (2.2%). In the private sector, wage growth will stagnate (0.1%) due to lower economic activity, while in the public sector, it will remain relatively high (6.2%) due to January's disbursement of the second quarter of funds and last year's strong growth as a result of the beginning of the process of eliminating wage disparities. In view of significantly slower labour productivity growth and accelerated growth of the compensation of employees per employee, Slovenia was in the group of EU Member States posting the greatest deterioration of cost competitiveness in 2008. Growth of the compensation of employees per employee is expected to slow and labour productivity growth to strengthen this year. The real effective exchange rate deflated by unit labour costs will thus decline. Due to lower prices of oil and other commodities and a decline in economic activity, inflation will be slowing this year, totalling 0.4 in the year as a whole. Y-o-y inflation will be at 1.4% at the end of the year. Consumer prices increased by 1.0% for seasonal reasons in March. Y-o-y inflation slowed to 1.8%; in the whole euro area it dropped to its all time low (0.6%). As a result of the base effect, inflation may swing downward considerably in the first half of the year, while towards the end of the year, prices will rise due to the this factor's opposite effect. Slovenian Economic Mirror, March 2009 4 In the Spotlight Assuming that the global recession will slow, positive economic growth (1.0%) can be expected again in 2010. All consumption aggregates will gradually see stronger growth or a smaller decline. Value added growth will start to pick up, first in export-oriented activities, followed by market services. Owing to Slovenia's high dependency on exports, the economic recovery will crucially depend on the situation in the broader environment and the efficacy of economic policy measures worldwide. As in 2010 economic recovery will be reflected in employment growth with a delay, the number of persons in employment will be lower also next year and the survey unemployment rate (7.0%) and the registered unemployment rate (10.3%) will increase. Next year, real gross wage rises will be slightly higher in both sectors; as a result of the continuation of the process of eliminating wage disparities (as agreed between the government and the trade unions, the last two quarters of funds will be paid at the beginning of 2010), the gap between the private and the public sector wage rises will be even somewhat wider. Average inflation will increase to 1.6% in 2010 and y-o-y inflation to 2.2%. current economic trends Slovenian Economic Mirror, March 2009 Current Economic Trends 7 International environment According to Eurostat's latest data, GDP in the euro area dropped by 1.6% in the last quarter relative to the previous quarter of 2008, posting 0.8% growth in the year as a whole. In quarter-on-quarter terms, GDP declined for the third quarter in a row, for the first time since data have been available year-on-year (-1.5%). In Q4, only general government consumption made a positive contribution to total GDP growth in the euro area, while the largest negative contribution came from exports. Six (nine) euro-area members fell into a technical recession in Q4, and only four of them enjoyed positive y-o-y growth. Economic growth in the euro area slowed significantly last year (0.8%), compared with that in 2007 (2.6%). In January, economic activity in the euro area continued to slow. The volume of industrial production and the volume of construction put in place dropped by a respective Figure I: Actual economic growth and forecast for the euro area 6 -4 -6 Actual growth Forecast OECD Nov.08 Forecast OECD Mar.09 O o a a a a 17.3% and 9.2% year-on-year. New orders in industry went down by more than a third compared with the same month last year. Turnover in retail trade also declined, by 2.1% y-o-y. The unemployment rate rose by 0.9 p.p. in the first two months of the year, totalling 9.1% in February. After a slight increase in February, inflation in the euro area dropped again y-o-y in March, totalling 0.6%, the lowest figure since data have been available (1996). The value of the business sentiment indicator fell further in March, but the decline slowed somewhat. At the end of March, the OECD revised its forecasts of economic growth for this and the coming year significantly downward. It predicts that in 2009 global GDP will decline by 2.75% and the volume of international trade by 13.2%. The forecast of this year's economic growth for the euro area was scaled back by 3.5 p.p. to -4.1% relative to November. GDP is also set to shrink in 2010. The ECB also released new forecasts of economic trends for the euro area, projecting a GDP decline of 2.2% to 3.2% this Figure 2: Movements of interest rates 8 -ECB -FED -EURIBOR3M 7 A ,1 -1 JI pi / M L K / A * A V ■w--i u/ ■-L -n / i Source: Eurostat, OECD Economic Outlook (December 2008, March 2009). Source: ECB, FED, www.euribor.org. Note: *Ranging between 0.0 and 0.25%. 4 6 2 5 0 4 3 2 0 Table 1: Assumptions by IMAD and forecasts of economic growth by international institutions 2009 2010 2008 EC Jan 09 IMF Jan 09 CONS Feb 09 CONS Mar 09 OECD Mar 09 IMAD Apr 09 EC Jan 09 MDS Jan 09 CONS Feb 09 CONS Mar 09 OECD Mar 09 IMAD Apr 09 EU 0.9 -1.8 -1.8 -1.8 -2.4 np -3.9 0.5 0.5 0.7 0.5 N/A -0.3 EMU 0.8 -1.9 -2.0 -2.0 -2.6 -4.1 -4.1 0.4 0.2 0.7 0.5 -0.3 -0.3 DE 1.3 -2.3 -2.5 -2.5 -3.2 -5.3 -5.1 0.7 0.1 0.8 0.7 0.2 0.1 IT -1.0 -2.0 -2.1 -2.3 -2.8 -4.3 -4.2 0.3 -0.1 0.3 0.3 -0.4 -0.4 AT 1.8 -1.2 N/A -1.2 -1.6 N/A -3.5 0.6 N/A 0.4 0.3 N/A -0.3 FR 0.8 -1.8 -1.9 -1.4 -2.0 -3.3 -3.3 0.4 0.7 0.8 0.6 -0.1 0.0 UK 0.7 -2.8 -2.8 -2.6 -3.0 -3.7 -3.5 0.2 0.2 0.6 0.5 -0.2 -0.2 US 1.1 -1.6 -1.6 -2.1 -2.8 -4.0 -4.0 1.7 1.6 2.0 1.7 0.0 0.0 Source: Eurostat. European Commission Interim Forecast (January 2009). IMF World Economic Outlook (January 2009). Consensus Forecasts (February 2009). Consensus Forecasts (March 2009). OECD Economic Outlook (March 2009). IMAD Spring Forecast (April 2009). Slovenian Economic Mirror, February 2009 8 Current Economic Trends Figure 3: Movements of Brent crude prices Source: EI A. year. A significant recovery of the economy is not even expected for 2010, when GDP growth is forecast to be between -0.7% and 0.7%. The IMF also revised downward its forecast for the euro area, projecting GDP to decline by 3.2% in 2009, a much higher figure than anticipated in January (-2.0%). In 2010, economic growth is set to be at 0.1%. The new Consensus forecasts of quarterly y-o-y GDP growth rates for our main trading partners are also significantly worse than in December. After the March and April cuts (0.5 p.p. and 0.25 p.p., respectively), the key ECB interest rate is now 1.25%. Further downward revisions have already been announced. The Fed left its key interest rate at the interval between 0.0% and 0.25%. The falling of interest rates on interbank Figure 4: Movements of the USD/EUR exchange rate 1.7 t^oooooooooo ]|jiji]ijiji]ijijij|ji Source: ECB. markets continued in March. The value of the 3-month EURIBOR declined by 0.31 p.p. relative to February, averaging 1.6%. Oil prices increased and averaged USD 46.6 a barrel in March. Oil prices remained stable in the first half of the month. In the second half, they increased, hovering somewhat above USD 50 a barrel. At its meeting in March, OPEC decided to leave its oil output unchanged. This comes after OPEC's reducing its daily output of oil in three steps, by 4.2 million barrels, since last September. In March, the average Brent crude oil price increased by 7.6% relative to February, and was down 55.0% y-o-y. In March, the euro again fluctuated relative to the main world currencies, but it remained below the value posted at the end of 2008. The value of the euro against the US dollar increased by 2.1% in March compared to February (average exchange rate of USD 1.3050 to EUR 1). The value of the euro also appreciated against the Japanese yen (average exchange rate of JPY 127.65 to EUR 1), Swiss franc (average exchange rate of CHF 1.5083 to EUR 1) and the British pound sterling (average exchange rate of GBP 0.9197 to EUR 1). Economic developments in Slovenia In January, the decline in the volume of merchandise trade was even more pronounced than in the previous two months.1 Merchandise exports declined by a nominal 26.0% y-o-y, merchandise imports by 31.5%. A significant decline was recorded for the value of external merchandise trade with both the EU and non-EU countries. The total merchandise Figure 5: Geographic distribution of merchandise exports Source: SORS; calculations by IMAD. 1 According to the external trade statistics. Slovenian Economic Mirror, February 2009 9 Current Economic Trends trade deficit amounted to EUR 69.7 m in January 2009, EUR 160.7 m less than in January last year. The sizeable decline in merchandise exports in Q4 (-8.9%) was a consequence of lower merchandise exports to almost all main trading partners. The decline in merchandise exports to the EU was not much of a surprise, given that recession deepened in the EU in Q4 2008. About half of the decline in total merchandise export growth came from a decline in Slovenia's exports to Germany (-2.2 p.p.) and Italy (-2.1 p.p.). Merchandise exports to Italy had already been declining y-o-y since the first quarter of 2008, while merchandise exports to Germany dropped for the first time in Q4 2008. The lowering of exports to France and Great Britain, which had started in Q3, intensified in Q4, with their respective contributions to growth totalling between -0.9 p.p. and -0.5 p.p. Looking at Slovenia's main trading partners, positive growth rates were only recorded for exports to Slovakia and Figure 6: Merchandise export growth by country -EU-4 -----EU new member states -----Russian federation -Countries of ex-Yugoslavia 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 ^OrNro^ri^rNro^rcorNro^r Oooo°ooo°ooo 5 5 5 Source: SORS; calculations by IMAD. Note: *EU-4: Germany, Italy, France, Austria. Poland and to the former Yugoslav countries. Exports to the Russian Federation, which had risen by 37.6% in Q3, dropped considerably in Q4 y-o-y (-10.2%). According to the structure of exports (SITC), among the main export products only exports of medicinal and pharmaceutical products made a positive contribution to export growth in Q4 last year, while the greatest negative contribution came from exports of road vehicles. Merchandise imports went down significantly in Q4 2008 (-6.1%), chiefly due to lower imports of intermediate goods. In Q3, growth of merchandise imports was still relatively strong (10.1%). Broken down by end-uses of product groups, amid the great decline in industrial production in manufacturing in Q4, the greatest drop was recorded for imports of intermediate goods (-7.4%), which contributed more than two-thirds to the total merchandise import Figure 7:Terms of merchandise trade Terms of trade ---- -Import prices Export prices Source: SORS; calculations by IMAD. decline. Imports of consumer goods also posted a sizeable decline (-6.0%), while imports of investment goods dropped slightly less (-1.0%). In terms of the structure of imports by product group, import growth was still mainly propelled by imports of oil and oil products, despite the slowdown, while the greatest negative contribution came from imports of road vehicles. The terms of trade improved somewhat y-o-y in Q4 2008.2 In Q4 2008, oil and non-oil primary commodity prices declined notably y-o-y (-25.0% and -18.3%, respectively). Export prices increased by 1.1% (in Q3 by 2.5%), import prices by 0.5% (in Q3 by 6.5%). The terms of trade, which had been worsening from Q4 2007 up to Q3 2008, therefore improved by 0.6% in Q4 2008. Figure 8: Industrial production in manufacturing 130 120 110 100 T3 90 80 70 -Original data - Seasonally adjusted data Source: SORS. 2 According to the external trade statistics. Slovenian Economic Mirror, February 2009 10 Current Economic Trends Box 1: Economic growth in Q4 2008 Against the background of the pronounced tightening of the global financial and economic crisis, economic activity declined in Q4 2008, for the first time since Q2 1993, as a consequence of notably lower exports and investment. Amid the global financial crisis spreading rapidly to other sectors of the economy, the GDP decline (by 0.8% y-o-y, 4.1% q-o-q, seasonally adjusted) was a result of significant lower export activity. After a notable slowdown in Q3, merchandise exports declined significantly in real terms at the end of the year (-9.4 %), while exports of services maintained their relatively strong growth (9.2%); the decline in total exports was therefore somewhat smaller, but still pronounced (-6.2%). Owing to the deteriorated international situation, investment activity also slowed significantly towards the end of the year (-5.3%). Investment in buildings and construction declined, and so did investment in machinery and equipment owing to limited sources of finance and lower capacity utilisation as a result of the deteriorated economic situation. Following the high growth rates of the past three years, changes of inventories made a negative contribution to economic growth in Q4 (-1.4 p.p.). With further modest household consumption growth (1.1%) and accelerated growth of government consumption (5.0%), final consumption recorded positive growth, yet as in Q3, significantly weaker than in the first half of the year. Against the backdrop of waning export and investment activity, imports also posted a decline (-6.6%), both for merchandise (-7.3%) and services (-1.7%). Amid weakening economic activity in Q4 as a result of significantly deteriorated economic conditions in the international environment, economic growth almost halved in 2008 relative to 2007 (to 3.5% from 6.8%). Lower export growth went hand in hand with a significant decline of activity in manufacturing; value added growth also slowed remarkably in construction and trade, but remained relatively high in financial intermediation and transport. The decline in domestic and foreign orders in particular had the greatest negative impact on manufacturing industries, where (after a marginal decline in Q3) value added declined by 10.5% in real terms in Q4. Growth of construction activity also slowed significantly in Q4 (from 14.2% to 3.1%), but construction nevertheless remained the fastest growing activity last year. With lower industrial activity and a slowdown in construction, growth rates of value added also declined in business services at the end of the year, and decelerated in trade. In transport, value added growth remained relatively strong. The slowdown of value added growth in financial intermediation was moderate (8.2%), given that growth of net interest income of banks remained fairly strong, largely thanks to the effect of high inter-bank interest rates. Figure 9: Expenditure structure of GDP growth Figure 10: Production structure of GDP o o C o D _Q Private consumption Gross fixed capital form. ■ Exports of goods and serv. -GDP real growth (right axis) 25 20 15 10 5 0 -5 -10 Government consump. S Changes in inventories Imports of goods and serv. 10 -15 Q U O Source: SORS. 160 150 — Food and alcoholic beverages in HICP — Producer prices of agricultural products, total o 7 140 o O O (N % 130 C 120 110 100 Jan 07 i-v i-v r-v co co 00 000 00 0 £ ^ S 1 £ ^ Source: SORS; calculations by IMAD. Oct 08 In January, low production activity in manufacturing continued. Industrial production was 0.4% higher (seasonally adjusted) than in the month before, when the volume of production was very low, but was down by as much as 19.3% (according to the working-day adjusted data) relative to the comparable month in 2008. Among the EU countries, January's shrinkage of production was higher in new Member States (Slovakia: -32.7%; Estonia: -29.3%; Latvia: -27.2%; the Czech Republic: -26.0%); production activity in the EU declined by 18.3% on average relative to January 2008. The number of persons employed in manufacturing declined by 11,886 or 5.3% relative to January 2008. The largest contribution (around one-half, in total) to the decline in this number came from the manufacture of textiles Slovenian Economic Mirror, February 2009 11 Current Economic Trends (1,409), clothing (1,072), wood-processing (1,308), other machinery and equipment (1,094) and motor vehicles (991). Last year, productivity in manufacturing dropped, largely as a result of rapid declines in production volumes over the last months of the year. In the coming months, the labour market is thus likely to be still adapting to the circumstances of lower production activity and to last year's higher growth of real wages relative to productivity growth. The prospects for the coming months remain grim. In March, the current situation indicators deteriorated further, hitting the lowest figures to date. The lowest estimates were obtained for the level of export orders, given that the share of managers estimating that export orders had dropped relative to the month before was 78 p.p. higher than the share of those assessing that export orders had increased. In contrast, indicators of expectations for the next three months (except for the indicator of expected prices) improved somewhat, but nevertheless remained exceptionally low. Construction activity remained at a lower level than before the notable slowdown at the end of last year, despite Box 2: Spring forecast of economic trends Assuming a further deterioration of the situation in the international environment in 2009 as a result of the global financial and economic crisis, the spring forecast projects negative economic growth for this year (-4.0%). The GDP decline with regard to the positive economic growth projection in the Revised Autumn Forecast of December 2008 (1.1% according to the baseline and 0.6% according to the alternative scenario) is a result of deteriorated conditions and prospects for Slovenia's main trading partners; the forecasts for the countries outside the EU were revised more notably than those for the EU. Investment and export activities, the key engines of economic growth over the past years, are set to decline in 2009, as a result of a deeper financial crisis, which spilled over into other sectors of the economy through tightened lending conditions and a decline in confidence among business entities. Exports will decline by 8.6%, particularly merchandise exports, while investment will fall by 12.0%, especially investment in machinery and equipment as well as construction. As a result of increased downward pressure on inventories, they will make a negative contribution to economic growth this year (-2.2 p.p.), in the wake of strong increases in the previous years. Private consumption is also expected to decline in 2009 (-0.6%), due to less favourable conditions on the labour market reflected in a modest increase in disposable income and a higher propensity of households to save. Only government consumption is thus projected to increase (3.2%) relative to the year before. With weaker export activity and considerably lower domestic consumption, particularly on account of the investment drop, imports will also post a remarkable real decline (-10.3%). Value added will decline in most private sector activities, most notably in manufacturing and construction. The key limiting factor in manufacturing (-9.0%) will be low demand (foreign and domestic). The decline of value added in construction (-10%) will be a result of lower investment in road infrastructure construction; construction of buildings will decline as well. Value added will also shrink in market services (-2.8%), most notably in those that are closely linked to industrial and construction activities. The tightened economic situation will lead to increased unemployment. The average gross wage in the private sector will remain at the level of last year, while wage rises in the public sector will be relatively high. Employment is expected to drop by more than 5% and the number of employed persons by more than 4%. These numbers might have been even higher, if the government had not started to implement the measure of subsidising full working time at the end of the year. The survey unemployment rate will increase to 6% and the registered unemployment rate to 8.9% (close to 100,000 registered unemployment persons at the end of the year). In the private sector, growth of the real gross wage will post a significant slowdown (to 0.1%), while in the public sector it will remain strong (6.2%) due to the process of eliminating wage disparities. Inflation is projected to moderate further, assuming lower prices of oil and slower food price rises, as well as slower economic activity. A considerable downward swing of inflation is projected in the first half of the year, mainly as a result of the high base (high oil price rises in the first half of 2008). The base effect is expected to work in the opposite direction towards the end of the year and inflation is set to increase, reaching 1.4% in December and 0.4% for the year as a whole. Owing to the fast and strong deterioration of the situation in the international environment, the risks to the forecast are significant, especially the downside risks. The Spring Forecast is based on the assumption that economic activity will not rebound significantly before the middle of 2010. Economic growth will therefore only be slightly positive in 2010 (1.0%), but is expected to strengthen somewhat in 2011 (2.7%). In the event of a deeper and longer-lasting recession in Slovenia's trading partners, economic growth may be lower than the central forecast for the next two years. This risk is higher than the probability that the decline of economic growth in 2009 will be lower than the central forecast and the recovery in the coming years faster, which could be a result of measures adopted at the global level and in Slovenia in response to the crisis. 12 Slovenian Economic Mirror, March 2009 Current Economic Trends Box 2: Spring forecast of economic trends - continue Figure 11: Contributions to economic growth by component, 2000-20010, in p.p Imports of goods and services Exports of goods and services Changes in inventories and valuables Gross fixed capital formation Government consumption Private consumption -GDP Ü 20 C C 15 t» o 10 CT n n 5 o ^ 9 0 ^ o -5 c o -10 C -15 <> U 2006 2007 2008 2009 2010 2011 forecast forecast forecast Source: SORS; calculations by IMAD. Figure 12: Central forecast and probability of expected deviations 10% i i 10% rN rN rN rN Source: UMAR. January's increase. The value of construction put in place was up 22.4% from that in December, according to seasonally-adjusted data. Construction activity was thus at a similar level as mid-2008, yet markedly higher than in November and December, when it had posted a significant slowdown. However, it has to be noted that last year construction activity was at its highest at the beginning of the year, after which time it declined. of the stock of contracts was 8.5% lower in January than in the year before. In January, the value of new contracts decreased by 28.5% y-o-y. This is also corroborated by seasonally-adjusted data for business trends; the overall order-books and expected order-book indicators hit the lowest levels since data have been available (March 2002). The most important limiting factor was"insufficient demand," reaching the highest value in March. Data on new contracts and business trends do not suggest a further strengthening of construction activity in the coming months. According to the construction statistics, the value Figure 13: Value of construction put in place 220 200 £ 180 160 140 120 Construction Buildings Civil engineering Electricity production rose significantly year-on-year also in February, due to a large surplus of hydro-energy, while the decline in consumption was still to a great extent related to lower production of aluminium. Electricity output rose by 6.4% y-o-y in February, largely due to the output of Table 2: Selected monthly indicators of economic activity in Slovenia In % 2007 2008 I 09/ XII 08 I 09/ I 08 Exports1 16.9 4.7 -5.0 -22.4 -goods 16.3 1.2 -0.8 -26.0 -services 20.1 20.8 -17.7 -5.6 Imports1 18.3 6.1 -21.3 -29.8 -goods 18.1 5.5 -17.4 -31.6 -services 20.1 9.8 -39.5 -15.1 Industrial production 6.2 -1.22 0.73 -17.4 -manufacturing 7.5 -1.32 0.43 -19.2 Construction -value of construction put in place 18.5 15.72 22.43 -20.7 Source: SORS; calculations by IMAD. Sources: BS, SORS; calculations by IMAD. Notes: 'balance of payments s 2seasonally adjusted ,3working-day adjusted data. Slovenian Economic Mirror, February 2009 13 Current Economic Trends hydroelectric plants, which rose by as much as two-thirds. Over the last four months, hydroelectric plant output was significantly higher than anticipated in Slovenia's electricity balance (EEB); due to the abundant amounts of snow in the mountains, the situation will be similar in the spring. Electricity consumption dropped by 11.9% y-o-y in February (by 7.5% in January, by 14.0% in December). Decreased consumption in aluminium production contributed 44% to the decline (65% in January). Electricity consumption from the distribution network dropped by 6.6%. As a result of increased electricity production and lower consumption, net electricity exports totalled 218 GWh, accounting for 19.0% of production. In January, retail trade3 continued to see a slowdown of activity in the durable goods sector. Real turnover in the sale and repair of motor vehicles declined y-o-y for the fourth month in a row, by as much as 27.1%, the largest decline since data have been available (January 2000). This is also a consequence of a lower number of first car registrations, which dropped by 22.7% in Q1 2009 relative to the same period last year. The sale of freight vehicles also declined, given that the number of road tractors registered in Q1 2009 was as much as 82.1% lower than in the same period last year. Real turnover also went down in the sale of non-food products (-1.8%). Only in the sale of food, beverages and tobacco did turnover growth (10.6%) not see a decline. The confidence indicator in retail trade fell to a new low again in March, suggesting that activity will also continue to decline in the coming months. Figure 14: Real turnover in retail trade Figure 15: Business tendency 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 Total retail trade (Food, Non-food, Automotive fuel) -Food, beve rage s, tobacco -Non-food (except automotive fuel) -Automotive fuel ■ Sale and repair of motor vehicles y y ^ \ V / / \ / \ ■c. ✓✓ \ /■ v. — 's-— —- —\ / J- -r Y—' ' —. o> p eS p eS Source: SORS; calculations by IM AD. Despite the second successive rise, the consumer confidence indicator was still more than one half lower in March than before the autumn fall. Consumers were more pessimistic than in February largely regarding the price movements, Economic sentiment Retail trade Service act. Manufacturing Consumers Construction 40 3 In retail trade, sale and repair of motor vehicles (47+45). O Source: SORS. major purchases and saving. New car registrations by natural persons saw a significant decline (-24.2%) in the first three months of 2009 (also on account of last year's strong growth), and so did net flows of consumer loans. In January and February, households made net repayments of these loans (-EUR 18 m; compared with EUR 30 m borrowed by households in 2007). The business sentiment indicator also dropped in March, reaching a new low. For the second month in a row, the decline in the overall indicator was mainly due to the drop in the value of the confidence indicator in service sectors. The confidence indicator values also dropped in manufacturing, retail trade and construction, while the consumer confidence indicator rose for the second consecutive month, though it is still significantly below the level of the same period in 2008. Labour market After December's decline, which exceeded the usual seasonal layoffs due to the termination of fixed-term contracts, employment also continued to drop in January. Both the number of employed and the number of self-employed persons decreased. In January, the number of persons in formal employment was 8.000 (0.9%) lower than in December and only 0.6% higher y-o-y. Broken down by activities, the number of persons in formal employment declined the most in manufacturing (by nearly 4,500 or 2.1%) relative to December 2008, and in agriculture, construction, hotels and restaurants and other miscellaneous business services where it dropped by more than 1%. It increased in financial intermediation, public administration and education. The number of vacancies and the number of persons hired also continued to decline; the latter was already around two-fifths lower 14 Slovenian Economic Mirror, March 2009 Current Economic Trends Figure 16: Persons in employment by activity I Nov 08/0ct 08 ■ Dec 08/Nov 08 ■ Jan 09/Dec 08 0.5 0.0 -0.5 Table 3: Labour market indicators -1.0 -1.5 -2.0 -2.5 Source: SORS; calculations by IMAD. than a year before. However, the number of work permits for foreigners remained high in January. The number of temporary personal work permits and the number of employment permits continued to increase, especially for occupations with shortages, while the number of seasonal work permits declined. The number of unemployed persons also increased notably in February and March, albeit less than in January. The number of registered unemployed increased by a further 3,271 (4.4%) in February and 2,500 (3.2%) in March, to 77,182 and 79,682, respectively, and in March it was already 24.0%% higher than a year before. In February, a total of 8.157 people registered anew, which in % 2007 2008 I 09/ XII 08 I 09/ I 08 Labour force 1.6 -0.6 0.0 1.0 Persons in formal employment 3.5 3.1 -0.9 0.6 - Employed in in enterprises and organisations and by those self-employed 3.3 3.1 -0.9 0.7 Registered unemployed -16.9 11.4 11.6 6.7 Average nominal gross wage 5.9 8.3 -2.8 6.8 - private sector 6.91 7.81 -4.3 3.5 - public sector 4.11 9.71 0.6 15.3 2008 I 08 XII 08 I 09 Rate of registered unemployment, in % 6.7 7.4 7.0 7.8 Average nominal gross wage (in EUR) 1,391.43 1,326.19 1,457.66 1,416.40 Private sector (in EUR) 1,315.49 1,266.01 1,369.45 1,310.70 Public sector (in EUR) 1,642.58 1,523.68 1,745.65 1,756.23 Sources: ESS, SORS; calculations by IMAD. Note: 1SCA2002. is 37.0% less than in January, but almost twice as much as in February last year. Especially the number of persons who became unemployed because they lost work is increasing significantly compared with last year (6,935 in February). Only 2,728 unemployed persons landed jobs in February, 14.0% less than in January and 34.5% less than in February last year. In January, gross wages were lower than in December, and their y-o-y growth also slowed again. The gross wage per employee declined by a nominal 2.8% in January compared with the month before, posting 6.8% y-o-y growth. -6 Figure 17: Unemployed who lost work and unemployed who found it 12 10 to 8 I 6 cD 4 SE 4 o. 2 E § 0 S -2 ^ -4 Figure 18: Nominal gross wage per employee A \ -Lost work 2009 -Unemployed who found work 2009 ----Lost work 2008 ----Unemployed who found work 2008 ---------Lost work 2007 ---------Unemployed who found work 2007 \ \ \ ^ / — V' - - ✓ / C ^ CT Op 3 3 (U —i Slovenia: Inflation Slovenia: Inflat. excl. energy and unproces. food Euro area: Inflation Euro area: Inflat. excl. energy and unproces. food Source: SORS, Eurostat. 8 6 4 2 0 16 Slovenian Economic Mirror, March 2009 Current Economic Trends Figure 21: Producer prices of manufactured goods on the domestic market ■ Producer prices of manufactured goods, total ■ Manufacture of food products Manufacture of metals and metal products 16 14 12 10 8 S o 6 CTI ^ 4 0 2 > 0 -2 -4 -6 Source: SORS. observed in the manufacture of leather and leather products (6.6%); prices in electricity supply increased as well (by 4.1%). Y-o-y growth nevertheless continues to slow (1.2%), mainly as a consequence of negative y-o-y growth rates of prices in the manufacture of food products (-1.2) and in the manufacture of metals and metal products (-6.6%). Price competitiveness of the Slovenian economy continued to improve in January, after a one-month break. The real effective exchange rate deflated by relative consumer prices dropped slightly again in January (by 0.1% at the monthly level and y-o-y), after it had strengthened at the monthly level in December and remained at the level of November year-on-year. Nominal growth of the effective exchange rate slowed at the monthly level from 1.2% to 0.1%, largely under the influence of a further depreciation of the EUR to the USD and CHF amid a concurrent slowdown against the GBP; in y-o-y terms, it continued to decline (-0.4%). The euro also appreciated against other currencies of Slovenia's main trading partners (particularly the CZK, PLN and HUF) in January. After declining at the monthly level for six months, relative consumer prices in January were only slightly higher than in the same month last year (0.3%). Following a pronounced deterioration at the end of 2008, price competitiveness in manufacturing also improved in January and its y-o-y moderation slowed somewhat. The real effective exchange rate deflated by relative producer prices in manufacturing (on the domestic market) dropped in January (-0.4%), after posting accelerated growth in the last two months of 2008. Its y-o-y growth therefore also declined (from 2.7% to 2.0%). In January, the monthly drop in producer prices in Slovenia (-1.0%) was higher than in Slovenia's main trading partners (-0.4%), which contributed to a decline of their relative y-o-y growth (2.4%, 3.1% in December), which was otherwise relatively modest in the whole period up to November 2008. Cost competitiveness continued to deteriorate y-o-y in Q4 2008. Growth of the real effective exchange rate deflated by relative unit labour costs (ULC) slowed somewhat due to the concurrent depreciation of the euro, but was still very strong (5.0%, Q3: 5.4%). At the same time, real unit labour costs continued to increase at an accelerated pace (7.1%; Q3: 5.1%). Given that after several years of relatively favourable dynamics, real exchange rate Box 3: Weight of liquid fuels and energy in the HICP Oil prices, which impact the price movements in Slovenia and in the total euro area through prices of liquid fuels for transport and heating, were a key driving factor of inflation dynamics in 2008 and 2009. On account of the high share of liquid fuels in the harmonised index of consumer prices (HICP), oil price movements play a more important role in inflation dynamics in Slovenia than in the total euro area. The share of these fuels accounted for 8.9% in Slovenia and 5.5% in the total euro area. Both shares have declined somewhat this year, but the share in Slovenia is nevertheless still higher. Amid further changes on global markets, oil prices will have a slightly lower impact on inflation than last year, though their impact in Slovenia will still be higher than at the level of the total euro area. Figure 22: Share of the group in HICP ■ 2007 I 2008 ■ 2009 16 14 12 10 Ö- 8 Fuels -total Liquid fuels for transport and heating Euro area Slovenia Euro area Slovenia Source: Eurostat. 6 4 2 0 Slovenian Economic Mirror, February 2009 17 Current Economic Trends growth had already been significantly higher since Q4 2007 and growth of real unit labour costs since Q2 2008, the deterioration of cost competitiveness was also pronounced in 2008 as a whole (4.9% or 3.6%). Real unit labour costs also increased in a number of other EMU and EU countries in 2008, though in most of them less notably than in Slovenia. In Q4, Slovenia was ranked second in terms of real unit labour cost growth, and fifth in the year as a whole, compared with the EU Member States for which quarterly data are available. In Q4, cost competitiveness deteriorated due to a labour productivity drop (-2.9%), amid otherwise moderate growth of compensation of employees per employee. Owing to Box 4: Market shares Slovenia's aggregate market share on foreign markets' dropped in 2008, after rising without interruption for seven years. Its 3.4% drop to 0.591% (from 0.612% in 2007) was a result of a decline in Slovenia's market shares in all main trading partners inside and outside the EU, particularly in the second half of the year. After a one-year break, Slovenia's market shares dropped again on the German and French markets last year, and also in Italy, in the wake of six-year growth, while the market share in Austria further declined for the second year in a row, after rising for seven years. Looking at other EU markets, Slovenia's market shares fell somewhat more significantly in Spain, Hungary and in the Czech Republic, after several years of pronounced growth. Outside the EU, Slovenia's market shares continued to fall in Croatia, Russia and in the US. A detailed analysis of the dynamics of the merchandise market share in the EU2 shows that its last year's decline was only partly attributable to deteriorated export competitiveness. The market share decline in the EU (-4.2%, 2007: 9.4%) was in great part underpinned by increased EU imports under the influence of high energy price rises3. The accelerated market share decline in the second half of the year, when energy prices had already fallen notably after the reversal in the middle of the year, was nevertheless also a result of waning export competitiveness. This is also corroborated by the dynamics of the market share of manufactured goods, showing a moderate increase in the first and an accelerated decline in the second half of the year. They were significantly affected by last year's drop in road vehicle exports, which had posted very strong growth in 2007 (42.3%). The slight drop in the market share of manufactured goods (-0.6%, 8.8% growth in 2007) was a consequence of the decline in the market share of products classified by material4, and the decline in the market share of miscellaneous manufactured articles5, while the growth of the market shares of chemical products and machinery and transport equipment remained positive. With the decline in the market share of road vehicles (-2.2%, 2007: 27.2%), growth in the market share of machinery and transport equipment slowed notably (1.3%, 17.8%), but remained positive, given that growth in the market share of other products of this sector remained relatively strong (7.0%, 9.1%). Growth of the market share of chemical products, which was a result of the increase in the market share of medical and pharmaceutical products, declined (to 2.3% from 9.2%). The slight decline in the otherwise less important market share of agrifood products (-0.2%) was a consequence of the decline in exports of food products, while the decline of the market share of raw materials (-5.0%) came from lower exports of crude materials, except fuels. While Slovenia was among the EU Member States with the highest market share growth on global and EU markets in 2007, the figures for 2008, which are only available for EU markets, show that its ranking deteriorated. Slovenia dropped from the small group of (ten) countries posting market share growth on the EU market; given that its market share decline was marginal (-0.4% according to the Community concept6), Slovenia was among the Member States posting relatively smaller deteriorations of their positions on the common market (14th place, 2007: 3rd place with 13.1% growth). 1 Slovenia's 15 main trading partners: Germany, Italy, France, Austria, Netherlands, Belgium, Spain, UK, Czech Republic, Poland, Hungary, Slovakia, Croatia, Russia, US. 2 By Standard International Trade Classification (SITC) sections. 3 Without oil and oil products (SITC section 33), the market share decline in the EU was by 1.3 p.p. lower (2.9% instead of 4.2%), and without mineral fuels and lubricants (SITC section 3) by as much as 2.9 p.p., given that energy products account for a very low share in the structure of Slovenian exports (oil products 1.1 %, fuels and lubricants 2.5%, according to the data for 2008) and a significantly higher share in the structure of EU imports (11.1% and 15.6%, respectively). The effects of energy price rises on Slovenia's exports were therefore smaller. 4 Made from leather, rubber, paper, wood, textile and metals. 5 Prefabricated buildings, furniture, clothing, footwear and other consumer goods. 6 Data on merchandise exports published at the national level by SORS (national concept) were used for the calculation of market shares, and for reasons of comparability, data on merchandise exports sent by SORS to Eurostat (Community concept) for international comparisons of Slovenia's market share growth. The latter are higher than the former, as the Community concept also includes merchandise trade of business entities with foreign (non-Slovenian) tax numbers. 18 Slovenian Economic Mirror, March 2009 Current Economic Trends Figure 23: Market shares Aggregate market sh. - Italy ■ Austria (right axis) 0.8 0.7 0.6 £ £ 05 -C n 04 rö S 0.3 0.2 0.1 0.0 ■ Germany France Russia (right axis) 1.5 I 1.3 1.1 0.9 | fč 0.7 » 1 0.5 iö S 0.3 0.1 -0.1 o o> -2 ? -4 > -6 -8 -10 -12 Figure 24: Market shares on EU market according to SITC 10 8 6 -S 4 ■5 2 ' 0 I HI1!' 1st half of the year I 2nd half of the year b £ £ - E a -C U Source: SORS, Eurostat, WIIW, US Census Bureau; calculations by IMAD. Source: SORS; calculations by IMAD. Note: *Fuels and lubricants (SITC 3). slower growth since Q4 2007, labour productivity was also modest in 2008 as a whole (0.7%), as a result of a gradual slowdown of economic activity and its Q4 drop, amid further relatively strong employment growth. The moderate growth of the compensation of employees per employee in Q4 (7.1%) was a result of slower growth of wages in the private sector. In the year as a whole, their growth was nevertheless relatively strong (8.6%), due to the adjustment of private sector wages for higher-than-anticipated past inflation and productivity in the first, and the elimination of wage disparities in the public sector in the second half of the year. After several years of favourable cost competitiveness trends, last year's deterioration was particularly pronounced in manufacturing, which posted the most notable labour productivity decline in Q4 (-8.8%, -1.0% in the year as a whole) due to a significant deterioration of the situation in the international environment and a consequent value added drop. Growth rates of nominal and real unit labour costs therefore increased (to 15.6% and 10.6%, respectively, in Q4, and to 9.7% and 6.1%, respectively, in the year as a whole), in spite of slower growth of the compensation of employees per employee in the second half of the year. Figure 25: Real and nominal effective exchange rates 5 Nominal effective exchange rate • Real, deflated by CPI • Real, deflated by PPI Figure 26: Cost competitiveness of the economy Compensation per employee, nominal Labour productivity, real -ULC, nominal -ULC, real ---Real effective exchange rate, deflator ULC 12 10 S 8 o & 4 c o -4 rN ro ^ OOO rN ro ^ OOO rN ro ^ OOO Source: ECB, SORS, OECD; calculations by IMAD. OOO Source: SORS, ECB, Eurostat, OECD; calculations by IMAD. 6 0 2 0 -2 Slovenian Economic Mirror, February 2009 19 Current Economic Trends Table 4: Prices in % 2008 2009 XII 2008/ XII 2007 ® (I 08-XII 08)/ ® (I 06-XII 07) II 09/ I 09 II 09/ II 08 ® (I 08-XII 08)/ ® (I 06-XII 07) Consumer prices (CPI) 2.1 5.7 0.5 2.1 4.9 Goods 1.3 6.0 0.6 1.6 5.0 - Fuel and energy -7.2 10.6 3.2 -1.1 7.6 - Other 3.2 5.0 0.1 2.1 4.5 Services 3.8 5.0 0.4 3.4 4.7 Consumer prices (HICP) 1.8 5.5 0.6 2.1 4.8 Administered prices1 -7.8 9.6 2.5 1.0 6.0 - Energy -11.9 14.4 4.3 6.2 9.9 - Other 0.4 0.1 0.0 0.7 0.1 Core inflation - trimmean 2.6 3.9 0.3 2.4 3.6 - excluding (fresh) food & energy 3.9 4.6 0.3 2.8 4.3 Consumer prices in the EMU 1.6 3.3 0.4 1.2 2.9 Producer prices of domestic manufacturers - domestic market 3.1 5.6 0.2 1.2 4.9 - EMU -0.1 2.1 0.4 -0.3 1.9 Sources: SORS. Eurostat. calculations by IMAD. Note: 1 due to annual changes of the administered price index. figures are not directly comparable across years. Figure 27: Cost competitiveness by sector, 2008 Compensation of employees per employee I Labour productivity, real ■ ULC, nominal ■ ULC, real 12 -3 C,D,E D* F G,H,I J,K L -P Total Source: SORS; calculations by IMAD. Note:*estimate. Balance of payments In January, the current account deficit reached EUR 7.8 m (EUR 194.1 m less than in January last year), mainly because of the lower trade deficit. The surplus in the services balance widened as well, while the deficits in current transfers and factor incomes narrowed. The trade deficit totalled EUR 38.3 m in January this year, EUR 149.9 m less than in January last year. The narrowing was mainly due to the lower deficit in trade with the EU, which had declined for the third month in a row, and partly also to the modest surplus in trade with non-EU countries. The surplus in the services balance, which totalled EUR 135.1 m in January, was EUR 15.3 m higher y-o-y. The increase was mainly driven by higher net exports of travel, communication and other business services. The lower trade surplus in transport services Figure 28: Components of the current account balance Trade balance Services balance Factor incomes Current transfers -Current account -400 -500 o o Q S Source: BS. Slovenian Economic Mirror, February 2009 20 Current Economic Trends Table 5: Balance of payments I 09, EUR m Inflows Outflows Balance1 Balance, I 08 Current account 1,647.0 1,654.7 -7.8 -201.9 - Trade balance (FOB) 1,196.1 1,234.4 -38.3 -188.3 - Services 330.6 195.6 135.1 119.7 - Income 87.6 162.4 -74.7 -77.6 Current transfers 32.6 62.4 -29.7 -55.7 Capital and financial account 95.7 229.2 324.9 95.8 - Capital account 13.8 -11.4 2.4 5.0 - Capital transfers 13.5 -10.9 2.7 5.2 - Non-produced, non-financial assets 0.3 -0.5 -0.3 -0.2 - Financial account 81.9 240.6 322.6 90.8 - Direct investment 73.3 -32.3 41.0 40.5 - Portfolio investment 12.4 354.0 366.4 16.8 - Financial derivates -8.8 0.2 -8.6 3.1 - Other investment 5.0 -77.7 -72.7 30.3 - Assets 0.0 311.1 311.1 138.8 - Liabilities 5.0 -388.9 -383.8 -108.5 -Reserve assets 0.0 -3.6 -3.6 0.1 Net errors and omissions 0.0 -317.2 -317.2 106.1 Sources: BS. Note: 1a minus sign (-) in the balance indicates a surplus of imports over exports in the current account and a rise in assets in the capital and financial account and the central bank's international reserves. was mainly related to the strong decline in the value of merchandise trade. The factor income deficit narrowed chiefly on account of net interest payments on foreign loans, while the deficit in current transfers, which almost halved relative to January 2008, was mainly a consequence of the general government deficit. Interest rate cuts on international financial markets resulted in a decrease in interest receipts from loans given to the rest of the world, Figure 29: Financial transactions of the balance of payments Direct investment ^^M Portfolio investment Financial derivatives Other investment -600 -800 -1000 -1200 8 8 8 8 0 0 0 0 0 0 0 0 0 r c cp c r c cp c r fU S 3 e S e Q fU s 3 e S e Q fU s Source: BS. and an even higher drop of interest paid on foreign loans. Net interest receipts from investment in debt securities are dropping as well. The volume of capital flows, which was shrinking in the final quarter of 2008 y-o-y, strengthened in January 2009 mainly due to the sale of money market instruments. In January, international financial transactions (excluding international monetary reserves) registered a net capital inflow of EUR 326.1 m (in January last year EUR 90.7 m). The higher net capital inflow was largely generated by the net inflow of investment in securities and partly also by the net outflow from other investment. In January, the net capital inflow of direct investment remained around the same level as in January 2008 (EUR 41 m). In spite of the strengthening of equity capital, outward direct investment declined due to higher net liabilities to affiliated companies abroad. The bulk of the foreign direct investment inflow came from equity capital with reinvested profits. In January, investment in securities posted a net capital inflow of as much as EUR 366.4 m (EUR 16.8 m in January last year). Domestic commercial banks and the Bank of Slovenia were selling debt securities, mainly money market instruments. Foreign investors withdrew from investment in Slovenian equity securities, but marginally increased investment in debt securities. Other investments posted a net capital outflow of EUR 72.7 m in January (a net inflow of EUR 30.3 m in January last year). Short-term commercial credits recorded the largest decline both on the side of assets and on the side of liabilities, which is attributable to the dynamics of merchandise trade. Slovenian Economic Mirror, March 2009 Current Economic Trends 21 Slovenia's gross external debt totalled EUR 38.7 bn at the end of January, while gross external assets in debt instruments amounted to EUR 29.3 bn. Net external debt posted EUR 9.4 bn at the end of January and was EUR 79 m lower relative to that at the end of 2008. Financial markets In the wake of stagnation in the last two months of 2008, the lending activity of Slovenian banks strengthened somewhat in January and February mainly due to the government loans, but nevertheless lagged behind the level recorded in the comparable period last year by almost a half. Contrary to January, when corporate and NFI borrowing accounted for a large part of net flows, more than 60% of the total net borrowing in February came from government loans. Also in the first two months of 2009, Slovenian banks mainly resorted to long-term household deposits (which still had relatively favourable interest rates) to increase liquidity and foreign sources remained fairly limited. After falling for more than one year, in February the y-o-y growth rate of the volume of loans recorded its lowest value (15.8%) since comparable data have been available (2005). In February, growth of euro loans strengthened slightly for the second month in a row (1.2%), while the volume of foreign currency loans recorded the largest decline in the last three months (-2.3%) due to relatively high exchange rate risk. In the first two months, banks recorded net lending to domestic non-banking sectors in the amount of EUR 568.2 m, nearly one half lower than in the comparable period last year. This is a significant moderation, but other euro area members posted even Figure 30: Net flows and growth of domestic bank loans to domestic non-banking sectors I Households (left) i Government (left) ■ Enterprises & NFI (right) 800 700 600 500 c o = 400 E 300 LU 200 100 0 -100 Enterprises &NFI (left) Households (right) Total (right) 45 •y \J 40 35 30 25 20 15 10 o > CO CO CO CO c^ a ro a 5